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Speculation from a NYC venture capitalist

Category Archives: Industry Themes

Having felt like I was reading about a new investment every month from Alibaba, it got me thinking about how rapidly they are expanding their reach outside of China. While many have written about this recent frenzy, I had not seen anything comparing Alibaba’s investing activities in the US to that of Google and/or Amazon in China. As the digital platforms move towards true global competition, I got curious about the data.

Thanks to the folks at CB Insights, I looked at the data of investments made in the US by Alibaba and in China by Google and Amazon as far back as the data went.

By number of deals, Alibaba has a substantial lead, but by investment value (shown below), the difference becomes staggering.

The data is fairly stark. If you look at the individual deals, Alibaba is investing in all the areas you would expect — mobile, gaming, ecommerce — and even some you would not, expanding their sphere of knowledge and influence as they chart their inevitable global push. For Google and Amazon, is the difference deliberate and due to different strategic choices or is it because China remains a more difficult and protected environment to enter and invest? If it’s the latter, does that put the leading US platforms at a structural disadvantage competing in the global stage? We are entering a new era of the digital Game of Thrones and this will be interesting to watch play out.

Some notes on the data:

1) Investment dollars reflects total round size, as a reasonable proxy for invested dollars, as well as acquisitions. Some deals did not have any announced round size and are included at $0.

2) This is solely focused on investments and does not include capital associated with local operations in country.

Thanks to my colleague David Rogg for assistance pulling this post together.

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One of the hardest things in venture is timing. Pick the wrong time to disrupt a segment, and the result is a lot of optimism and lost investment dollars. Pick the right time to disrupt and you can build a massive company in a short period of time. Ideas are rarely bad, they are often simply at the wrong time.

A few years ago, we decided that the time had come for innovative changes in education. We followed that up with some very successful investments in companies like Lumosity, Knewton, Schoology, Straighterline, and others. Our macro thesis was pretty simple. First, it was an extremely large important market that hadn’t changed in a long time. Second, the cost curves in education had increased in multiples of inflation for decades and began coming under significant scrutiny as a result of the 2008/2009 recession. Third, the industry was supported by an array of subsidies and government regulations that was destined to change. Fourth, technology and software had the ability to dramatically reduce cost and bring an innovative value proposition “over the top” directly to the end consumers – eliminating traditional intermediaries along the way. The mix of market size, economic crisis, government changes, and technology created what we thought was the “right time”.

As we started observing other markets in a similar state of change, another one became obvious to us: healthcare. The only thing you might care about more than education is health. It’s a gigantic market. The cost curves have been increasing at an unsustainable rate. The government’s role is changing rapidly, and causing major shifts in who and how people pay. Consumers are now starting to take a much more active role on the paying side of the equation and doctors are beginning to select new technologies to power their practices (“over the top”). While different in specifics, the parallels to education are quite striking.

The exciting news is that we’ve already made a few bets in the area, and will be announcing some next week. We believe this is a tremendous opportunity to transform the sector and have a profoundly positive impact on lives. Stay tuned for more!

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Lots of discussion about whether a service should be “mobile first” or “web first”. I tweeted it actually should be “API first”, and I got a lot of reaction to that comment and asked to expand.

First let me clarify. I believe mobile IS important and a huge emerging channel. Source of traffic has shifted dramatically and I don’t have my head buried in the sand in that regard. Across many of my companies, mobile origination (tablet included) comprises anywhere from 30-50%+ of traffic. I recognize that access patterns have structurally changed.

When I say API first, I mean that an idealized service needs to start with a core infrastructure with robust APIs that is tapped into via any number of “front ends”: web, mobile, and even 3rd party ecosystems. If you look behind many “web first” companies today, including in our portfolio, you’ll see a very clean architectural split between the front end and the back end. The back end exposes a range of services that allows the front end to innovate independently and be re-purposed in interesting ways depending on changing business needs. The rate of change on the front end is usually a LOT higher than in the back; the scale and stability requirements on the back are far more demanding than on the front.

“Mobile first” companies really are just a front end selection accessing a solid API driven backend infrastructure. The use case, the logic, and what the app is optimized for may be a subset or different than Web, and I think this is what Fred Wilson and others are focused on.

But as I look at the world, while point of entry may vary, I believe having all three elements of web, mobile and 3rd party are going to be table stakes in the future. You CANNOT be one only. Users want different experiences for their different point of engagement. Mobile is about speed of access, much more transactional and timely, very much about getting something done. The web is great for researching, deliberating, and exploring. Both are different aspects of the same service, and I’d want both as a user depending. Finally, enabling third parties is a realization of the web services and SOA manifests from the late 90s that allow for programmatic distribution and can launch powerful new economic models.

Facebook has already shown us the above and what a powerful, mature, winning service looks like. They have their core site, their massively used mobile applications, and their various graphs 3rd parties access which gives them tremendous power, platform extension, and plata. Instagram, normally cited as the poster child for “mobile first”, recently announced they intend to move consumption to their core web site.

So to wrap up, sure, there might be some apps that are best started purely in a mobile context. But I’d bet 99% of the services out there will have to incorporate all three elements and that starts with building an incredibly solid foundation. API first, front end second, all screens third.

StraighterLine is an online, low cost, subscription based provider of general education courses that many take in their first two years of college (Algebra, Biology, Calculus, US History, etc). The courses are ACE Credit recommended and can be transferred for credit to various degree granting institutions (25+ automatically transfer today, over 200+ universities around the country that have accepted post review, and growing). What does that mean in lay terms? Well, you can flexibly and cheaply take a variety of high quality courses at a much lower cost than anywhere else, transfer into institutions that accept StraighterLine’s courses for credit, and bring your blended cost of a degree down dramatically.

The two charts below summarize well the drivers for an investment like StraighterLine:

Costs have skyrocketed faster than healthcare over the last few decades. Student debt has ballooned to over $1 trillion, surpassing credit card debt according to the Federal Reserve Board of New York. StraighterLine’s students pay $99/month and $39/course for their pay as you go service or $999 undiscounted for a Freshman Year equivalent. Against even public two year institutions, StraighterLine offers very significant savings for the student.

In addition to pricing, there are other issues lurking beneath the surface. Funding for public education is getting slashed. California’s 112 community colleges are having their budgets slashed by hundreds of millions of dollars. The system is having to turn away students because it is no longer able to find enough space to service them. The unfortunate incidents at Santa Monica College — where the school tried to create a higher priced system for the most in-demand courses in an attempt to balance with supply instead led to riots and maced students/children — underscore this point.

Taxpayer funding aside, the federal government is looking much more closely at graduation rates and successful job placements at institutions that accept students with federal aid. As institutions begin to trim enrollments and focus on academic quality, their acceptance criteria will continue to grow more selective. An institution like StraighterLine can be an effective partner in preparatory coursework to ease the transition and improve a student’s chances of success prior to formal enrollment.

Finally, as we think about structural unemployment challenges, the ability to easily access new learning, complete coursework in a flexible manner, and base competency on outcomes of learning and not on time spent in a course (ie, “credit hours”) will be a key part of solving the country’s labor issues. The influx of non-traditional students (older, single mothers, workers retraining) is expected to grow at a much faster rate than traditional college students, and we will need institutions that can cater to this class.

StraighterLine offers a scalable solution to these challenges, where all parties benefit – easing the burden on taxpayers who fund institutions, saving money for students seeking to improve skills, improving student selection for institutions seeking to raise academic performance, and democratizing access to education for a newly mobile work force. The ambitions of StraighterLine do not end there. Burck Smith, founder & CEO of StraighterLine, has been a passionate advocate and visionary in the education space for many years. His last company, SmartThinking, pioneered post secondary online tutoring and student support services and was acquired by Pearson.

With the round, we will invest heavily in building out a unique platform and set of services that innovate on behalf of students, embracing all of the things an online, data driven platform can do. We are working with a number of providers to build assessments to help the industry shift towards a competency based view of learning. And we are also engaging the employer community, to create better linkages between the education students receive and the more tangible successful outcome of employment.

Stay tuned for more, but suffice to say there is a fantastic opportunity to use technology and innovation to leapfrog America once again to the head of the global class! We are delighted to play a small part and partner with a great team in doing so.

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1 [Source: New York Times, Lewin, Tamar.“Higher Education May Soon Become Unaffordable for Most in U.S.”]

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Reading today about Apple redesigning their store experience got me thinking about the role of the store in the future. New online companies are exploding into multi-billion dollar vertical categories and growing rapidly. Does that mean there is no room for the store? Not in my mind, but it’s fundamental role will evolve consistent with our thesis around the convergence of offline and online models.

For the last few decades, retail companies expanded by driving greater and greater geographic footprint. Stores were the only point for transacting product and even today represent the preponderance of sales. “Same store” numbers helped to gauge the productivity of a store but top line most of the time was driven by number of new stores. Stores had P&Ls they were responsible for, and this system has created an entrenched infrastructure and KPI bias where many retailers measure and optimize around in-store traffic, rather than driving the “most efficient transaction” regardless of where they occur.

I believe this model has to change. Consumers have a myriad of choices on how and where to transact today. Online ordering with the very liberal return policies have made it far easier to buy something, try it, and send back than potentially taking a few hours to physically go somewhere. Buying has bifurcated into two buckets: routine transactions and inspired transactions. Routine transactions are things that we know we need, don’t require a lot of thinking, get replenished on a regular or reasonably regular basis, etc. We either know what we want (new jeans) or we’re indifferent across a broad enough range and need to solve a functional task (toothbrush). Inspired transactions are things that I’m not sure about, that I’d love to learn to fall in love with, that I am trying to discover. I want a new look instead of just jeans; I want to understand the philosophy of the brand that I am going to wear as I view it as an expression who I am.

I’d argue that the entire domain of routine transactions is designed to go online. It’s far more efficient and the best use of a consumers time. Educate me online and let me transact. Don’t make me spend hours to do a chore. The second category is where offline shines. I walk into the Apple store to engage with product. I’ll go into the Apple store to experience an iPad or the MacBook Air to see if I really care about how thin it is. I’ll subconsciously feel how “smart” the brand is in servicing me and differentiating. If I go to the showrooms on 5th Avenue, it’s to feel the luxury and curation of what Cartier or Saks represents. And it is about entertainment as much as anything else.

Heineken Lounge at an Airport - A Brand Experience

What does this all mean? Well, I see huge reductions in the number of points of presence for many retailers (not including same-day consumables like coffee or food). Retailers have to align with consumers, liberate their time and allow them to transact in whatever manner provides the greatest utility. Retailers should be in the business of selling things wherever that most efficiently occurs. My partner Larry told me about one innovative retailer that uses their physical store to crowd source and showcase new products only – as soon as something sells in meaningful volume (indicative of a repetitive buyer in a “routine transaction”), it is moved to the online store and that shelf space is freed for a new product to experience.

Over time, I see stores being “owned” by marketing and viewed as a brand expense instead of the revenue bearing, full P&L today. Should I penalize the store if you came in, had a great experience, and then bought online for convenience? Or more likely believe that it served its purpose? Controversial, maybe. But 10 years from now I think the retailers that survive the transition to digital will look at it more that way than how they do today. I also wouldn’t be surprised if 10 years from now, we see a flagship Gilt store on 5th Avenue and major cities around the world. It sounds crazy now, but that might be the most “efficient” way on a blended marketing basis to create mass awareness (like TV today).

The bottom line is that the role of the stores has to change. It cannot be about the purchase. Too much of buying is moving online. It has to be about experience, education, and inspired serendipity!

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I recently tweeted about the acquisition of HauteLook by Nordstrom. I think this is one example of many we will see in the coming years of large scale, “offline” incumbents buying their way into the future.

I believe every business today is going to be rewritten for the web, or “Internet optimized” as I call it. This is not about putting up a website or selling online. This is much more fundamental. The Internet affects literally every part of a business system and makes it much more cost efficient than their legacy comparable. Let’s take a few examples:

Marketing – Paid, organic, display, affiliate and other channels are far more precise and cost effective to pin point your audiences than any blunt mass-market tool of the past. You are connected to all your customers, it’s just a matter of finding them (and vice versa).

Product – In an Internet optimized business, the product is instrumented to see real metrics on how people are logging into your application, which functions people are accessing, what breaks and doesn’t, etc. Each of those tell you in real time what features to focus on or not, develop or discard, etc. Customers participate in the product development process.

Development – Multi-tenancy, single instancing, and SaaS makes development easier and faster than the complex install matrix of the past. Cloud services like AWS, Rackspace, Engine Yard and others are fully variable infrastructure available to build upon. AGILE and other development methodologies create output on regular basis.

Any “new” company is doing things efficiently across virtually all departments from the ground up (and includes areas not mentioned like sales, hiring, finance, and more). At scale, they will have a fundamentally better cost model than any legacy player possibly could. The legacy company still has those very expensive relationship based sales reps, or the high touch TV-driven ad model, or the “divine from above”/ “decide by committees” product model. These are all points of friction that makes them hard to change, slow to adopt new business models, and not innovative. It also leaves them at a fundamental economic disadvantage.

If you think about it, this concept is true for almost all businesses. We see retail in the Nordstrom/Hautelook example. The same is true in traditional advertising versus ad networks; console based gaming versus virtual goods businesses; large media publishers versus blog aggregators/publishing platforms; stock fit retail brands versus custom manufacturers; etc. The Web is as deflationary across the internals of a business as anything else! This wholesale rewiring is happening now, creating a unique moment in time and a littany of new companies looking to lead the pack.

The most likely way for offline players to evolve is to buy these Internet optimized businesses, incent those organizations to grow as rapidly as they can, retain the talent for as long as it possibly can, in the hopes they can eventually re-make their overall business by being led by example. Those that do nothing will not survive, and there will be many; those that think aggressively have a shot, and I think we’ll see much more of these partnerships with traditional brands and Internet optimized companies going forward.

[Update 4/08 – Random House leads round of financing at Flat World Knowledge]

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This was a long overdue post, but it’s been a busy year. Fitting this comes as we head into Thanksgiving. Our investment in Boomi came at an interesting time. There were plenty of scars from the legacy integration 1.0 and EAI worlds. Those companies were marked by significant services implementation relative to license sales to deal with unique customer environments. That made integrations complex, costly and brittle. Companies like Grand Central, Bowstreet, and others had all tried to ride the Web services, SOA, and interconnected enterprise wave in the early 2000s. Most were way ahead of their time, leaving lots of dead companies on the road of venture capital.

We believed Boomi’s timing was different. The emergence of cloud compute services and the growing maturation of SaaS was a stark change from the past. Both were important backdrops to answer the question “what had changed”. We’ve had a thesis on how the cloud would require the re-writing of various middleware services. While the team had a long history in EAI, they decided to bet the farm on the cloud in 2007 and wrote an innovative forward looking platform from the ground up. They launched in early 2008, and we invested in the summer 2008 on the backs of healthy customer activity. The business wound up growing very rapidly 300%+ CAGR, continued to launch new innovation upon innovation, won major awards, struck some good strategic partnerships, and eventually got purchased by Dell in an outstanding result for us as investors and for the employees. From the outside, it was how you’d script it. But there were definitely things we learned along the way. Below are a few of them:

• SOA and Web services (WS) are foundational, not competitive with integration. Many had a view that as a result of the maturation of Web services, integration was built in and no longer needed. In fact, turns out WS were foundational to doing integration in a flexible, repeatable manner. It allowed us to connect more easily to systems, but you still needed a platform to orchestrate, move, transmute, and connect these WS ports. We believe we are finally, after a decade, scratching the surface on how SOA will empower and impact applications going forward.

• It takes time to find your sweet spot in the pyramid. Boomi launched with incredibly disruptive pricing, which led to a lot of customers quickly adopting. Early on, it turns out many were very small businesses only looking to connect two low end applications, where the value of the platform was less obvious and there were simple alternatives in the “point to point” world. The value of an integration platform grows non-linearly with the number of points connected. We pivoted to focus on companies with slightly greater needs, where our platform value would be clear and our innovation led to high stickiness. It takes time to tease out who the *right* customers are for a new category product. Once we understood that, it helped clarify decisions around product roadmap, hiring, sales model, etc.

• Don’t be afraid to raise prices. Related to above, low price, high quantity led to a lot of early customers, but it didn’t scale exactly the way we wanted or attract the best fit customers for our product. But it led to a lot of buzz. As we realized our best customers were a little further up the pyramid, we worried that increasing pricing would also mean losing the very small business segment and perhaps impact buzz. We spent a lot of time thinking about the tradeoffs, but decided it was more important to align with our target customer. We increased prices three times and the business didn’t skip a beat (in fact inflected upwards). If you find your spot on the pyramid, align all parts of the business to it.

• SaaS delivery model changed everything. Unlike the legacy world, which was plagued by high services and one off implementations, true SaaS allowed us new functionality and velocity the market hadn’t seen before. We could do exciting things like using multi-tenancy to figure out what most people do when connecting applications, and auto recommend process maps. This eliminated 90% of the manual work in integration. Our platform could be opened up, allowing people to build connections and make them available to the entire community. We could get reasonably complex integrations done quickly and reliably.

• SIs say they love SaaS but it’s hard to break economic incentives. We worked with a number of larger SIs who individually loved what Boomi was doing, but collectively found it difficult to leverage the product. It broke the model of “billable hours”. “Easier to configure” made for efficiency, but not more revenue. Some newer more progressive SIs, like WDCi out of Austrailia were great, but bigger shops found it hard to change.

• Indirect channels are hard to predictably scale early on. In addition to SIs, we also worked with dozens of ISVs who were go to market partners for the Company. We began to see success but that came after years of effort. Mark Suster has a great perspective that fits our case pretty well. No one could care about our success as much as us, nor did it matter that much for others versus us.

• Conviction is important. When we first invested in Boomi, we planned to split the round with a co-investor and introduced the Company to a few shops. Most folks could not get there, so we decided to write the entire check. After the market collapse in 2008, we told the guys to just focus on the business and be smart with cash, which they did a great job of. There was constant inbound poking given the profile, but mostly off and on distracting conversations. We decided to write an additional check so the team could focus entirely on the business. And it was ever so rewarded!

Looking forward, we’re always sad to see a market defining company go. The team did an outstanding job and I’d work with them in a heartbeat. We are glad to have been a part of it. We think there continues to be a huge opportunity in cloud infrastructure software. The strategic interest in Boomi underscored that. Dell has a fantastic opportunity to own one of the cornerstone building blocks for public or private cloud offerings, and exploit that as a real differentiator versus others out there. Meanwhile, we’ll go back and look for the next great company to back!